How do L/S Investors Analyze Comps?
Growth rates and comps shortcuts for fundamental investors
When you are a fundamental investor evaluating stocks, you don’t need to know any advanced math or statistics. What you need is just a strong grasp of working with numbers and good mental math skills. You should also have a solid grasp of introductory/intermediate statistics and some basic linear (matrix) algebra, with the latter only needed if you want to get deeper into factors and risk, which many would argue you don’t even need to know.
It is quite surprising to see how many people aren’t fluent with numbers enough to work with comps and growth rates.
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Let’s go back to today’s writeup now.
I will walk through an example and then show you some formulas that should significantly simplify your life when dealing with growth rates / comps.
Growth rates versus comps
Whether you are looking at a growth rate of a KPI (e.g., year-over-year growth in revenue) or 1yr comps (same-store sales year-over-year growth for a retailer), the calculations are the same. Anything I write about 1yr/2yr/3yr comps here is also true for 1yr/2yr/3yr growth rates for any metric or KPI. To be clear: 1yr is equivalent to y/y (year-over-year), 2yr is equivalent to y/2y (year-over-two-year), etc. More on how comps are defined here.
In this case, let’s just work with comps and look at them on a quarterly basis. But you can easily replace “comp” with “n-year growth rate of any KPI” and “quarter” with “year”. The formulas and example will still hold true.
Projecting the forward quarter
Suppose the company has reported results for all 4 quarters of 2024 and we are now in Q1 2025. You want to infer the 1yr comp for Q1 2025. Needless to say, this is really important as you are looking ahead for the stock.
So, we know:
Q1 2024 1yr comp = 2% (reported by the company)
Q1 2024 2yr comp = 7% (reported by the company)
Q1 2025 1yr comp = ?
We are trying to get a sense of what the Q1 2025 1yr comp number might look like.
There are typically 2 cases here:
The Q1 2025 has just started or is about to start, so you don’t have any information about the quarter.
You are X days (usually X > 5) into the quarter and you already have data that shows you what the comps are tracking on a y/y, y/2y, y/3y basis.
Now, how do we go about inferring the Q1 2025 1yr comp?